25 Jun 2020

Landmark EU General Court ruling on Hutchinson-Telefónica UK merger reframes the threshold for proving competitive harm

By Dylan Barber, Linda Evans

The ACCC has concerns that Australian courts permit mergers too easily. A recent European case shows that the ACCC has a much easier task in Australian courts than the European Commission does in Europe's courts.

On 28 May 2020, the General Court of the European Union allowed an appeal brought by CK Hutchison Holdings in relation to the European Commission's decision to block the £10.3 billion proposed merger of Telefónica's "O2" and Hutchison's "Three" subsidiaries.

From a transactional perspective, the parties have moved on since their initial announcement of the merger, and Telefonica has recently announced a merger with Virgin Media's UK fixed line broadband and TV business. However, the unanimous decision is significant because of the high hurdle the European Court has set for the European Commission when it wants to block a horizontal merger under the EU merger regulation (EUMR).

The Court clarified that in the European Commission must prove there is a "strong probability" of a significant impediment to effective competition. By contrast, the Full Federal Court of Australia has recently confirmed that in order to block a merger the ACCC only needs to establish, on the balance of probabilities, that there is a "real chance" of a substantial lessening of competition.

Background to the Hutchinson-Telefónica UK merger

At the time the merger was announced in September 2015, the UK had four mobile network operators in the retail market: EE (30-40% market share), O2 UK (20-30%), Vodafone (10-20%) and Three UK (10-20%). The merged entity would become the largest mobile operator in the UK.

In May 2016 the Commission announced it would block the merger because it would result in significant impediments to effective competition. The Commission was concerned that:

  1. because Three and O2 were close competitors and Three was an "important competitive force" in the retail market, the merger would result in a sharp reduction in competition, leading to an increase in prices and a restriction of choice for consumers;
  2. the merger would disrupt two network-sharing agreements in place between the four mobile network operators, which would have a negative influence on quality of services and hinder the development of mobile network infrastructure in the UK; and
  3. the removal of Three would be detrimental in the wholesale market where mobile network operators supply services to other mobile players who do not have their own network.

The General Court's decision: "strong probability"

The Court rejected all of the European Commission's concerns because they were not proved to the requisite legal standard by the evidence.

What is the requisite legal standard?

In recent years, the European Commission has proceeded on the basis that it must prove a significant impediment to effective competition on the balance of probabilities, and made submissions to this effect to the European Court.

The Court rejected the use of the "balance of probabilities", instead stressing that there must be a "strong probability" of a significant impediment to effective competition:

"In the context of an analysis of a significant impediment to effective competition the existence of which is inferred from a body of evidence and indicia, and which is based on several theories of harm, the Commission is required to produce sufficient evidence to demonstrate with a strong probability the existence of significant impediments following the concentration. Thus, the standard of proof applicable in the present case is therefore stricter than that under which a significant impediment to effective competition is ‘more likely than not’, on the basis of a ‘balance of probabilities’, as the Commission maintains. By contrast, it is less strict than a standard of proof based on ‘being beyond all reasonable doubt’."

In a comment that is similar to those heard in Australia, the Court stressed that the Commission's theories of harm must be "sufficiently realistic and plausible" and not "solely conceivable from a theoretical point of view".

The test for merger clearance in Australia

In Australia, the test is whether the merger will have or be likely to have the effect of substantially lessening competition in a market in Australia (section 50 of the Competition and Consumer Act 2010 (Cth) (CCA)). The meaning of the word "likely" in this context has been the subject of debate: does it mean "a real chance"? Or does it mean "more probable than not"? The application of a balance of probabilities standard of proof to these concepts resulted in a two-stage test being applied in the first instance decision in Metcash:

  1. is it more probable than not that one of the counterfactuals will come to pass if the proposed transaction did not proceed? and
  2. is there a real chance that, if the proposed transaction did proceed, it would result in a substantial lessening of competition compared to the scenario in which one of the counterfactuals came to pass?

In the recent Pacific National decision, the Full Court of the Federal Court of Australia clarified the correct approach to the test. After comprehensively reviewing over 40 years of jurisprudence, the Full Court confirmed that there is no two step test, but rather a single evaluative judgment, and that "likely" in the context of section 50 of the CCA means a "real commercial likelihood", but does not mean "more probable than not". Further it was held that it is a distraction, and wrong, to ask what standards of proof apply to primary facts which involve predictions about the future.

A similar approach was taken by the Federal Court in the recent Vodafone-TPG merger case, where the Court found there was no real chance that TPG would roll-out a retail mobile network or become an effective, competitive fourth mobile network operator in Australia in the relevant future.

Key takeaways for European mergers

The European Court's decision is the latest in a series of international telco mergers to get the green light in Court after earlier hurdles, including the $15 billion TPG-Vodafone merger in Australia and the USD $26 billion merger of T-Mobile and Sprint in the United States.

More importantly, the European Court's decision has created a sharp distinction between the standards to which the European Commission and the ACCC have to prove adverse competitive effects. European merger cases must now meet a higher standard of proof.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.